“When a man with money meets a man with experience, the man with experience leaves with money and the man with money leaves with experience.”

Thursday, June 16, 2011

CAFC: The Movie

Film makers are known to use the description, "..based on a true story..", permitting them a degree of artistic flexibility, whilst they fill in the gaps in their knowledge.

As I explained in my last post, I received information about Charlton's takeover which greatly enhanced my understanding of how things might pan out from here.

In addition I’m fortunate to be in regular communication with a fellow fan (not a blogger), who also received information which was both consistent, and importantly derived from different but highly relevant sources.

By corroborating what each of us heard, yet acknowledging some 'artistic licence' as alluded to above, here’s our take on recent events at the club.

However first a small caveat - there is a lot of speculation in all of this and thus we may have misinterpreted some of the information we have received.

Whilst we think the ‘movie’ makes sense given the evidence we have, we certainly do not warrant that it is 100% accurate, let alone complete or even up-to-date.

Work commitments (rather than an explicit desire to seek further supporting evidence) have prevented me from writing this post earlier, but reassuringly developments at the club in the intervening period strongly support the thesis we espouse below.

The first thing to understand about the formal legal structure of the Club is that it is likely exactly what it appears to be, i.e. the club is owned by Baton Ltd (of which Richard Murray retains 10%), whilst Jimenez and Slater between them own 51% of CAFC Holdings (CAFCH), which in turn owns 90% of Baton Ltd.

To be clear, what this means is that if you did formal due diligence on CAFCH, or if you were the FA asking questions about the Club’s ownership, you’d be no wiser than the Club’s fans are today based on what has already been publicly disclosed.

You might find out who the minority shareholders are (and by definition there are at least five), and indeed that might well be interesting, but we don’t believe it would shed any more light on how the club is likely to be funded going forward.

In short, we doubt whether a mysterious ‘Mr or Mrs. X’ indirectly owns the club. Instead we are going to call Mr or Mrs. X the funder because that’s the role we believe he/she fulfils instead.

We believe we know who the funder is.

However given that he/she is keen for their identity to remain out of the public domain, we see no reason not to respect this wish and anyhow it is not especially relevant, except to add that we believe the funder to be considerably wealthier than anyone on the club’s Board.

Jimenez and Slater (plus Murray) own a majority of the Club and thus control it, and that should not be in any doubt. However we believe they don’t have enough capital personally to propel it forward, and that’s where the funder comes in.

So, how did the takeover come about? Why is the funder involved? What is his/her role and what might we expect going forward?

We are going to start with the assumption that his spell under Mike Ashley at Newcastle, led Tony Jimenez to fancy running a club himself someday.

Indeed if you are willing to look through the anti-Cockney bias of the Newcastle fans, he reportedly did a good job in the specific role that Ashley asked him to perform (whether the fans liked it or not is a different matter).

During his brief nine months in the North-East, the club brought in Gutierrez, Guthrie and Coloccini (all first team regulars today). They also brought in Xisco, but we won't talk about him.

Apparently, Jimenez had also lined up a deal with Luka Modric (who was ready to sign) but Ashley apparently rejected it. It seems he’s no mug in the transfer market.

However whilst it’s rumoured Ashley wishes he never set eyes on Newcastle United, unlike Jimenez he is stuck with it for now.

But imagine that the brief experience on the ‘Toon got Jimenez thinking about what could be achieved if a club could be found requiring limited upfront outlay, having less restless fans and ready for the similar type of top-down overhaul that Ashley tried to install.

Jimenez knows after all that he can get deals done, whilst his fellow ex-Newcastle pal Jeff Vetere is well-respected across Europe for his in-depth scouting knowledge.

Importantly they both know that the market for footballers is highly inefficient, because they see it with their own eyes every day (underrated gems lurking away from the spotlight; overrated mercenaries draining clubs of their capital etc.).

The loan market is another source of players of course, although not one that Charlton have used optimally in recent seasons.

Meanwhile Paul Hart's appointment clearly also signals they view the Academy as an important source of talent for the first team, as well as obviously as a source of ongoing transfer cash to be recycled back into the club.

The ideal target for their experiment would presumably be a 'one club city' outside of the Premiership (think Norwich/Southampton/Derby etc.), and/or a club in the rich South-East with more scope for higher ticket prices and commercial tie-ins.

The problem is that most football investors agree the above criteria are appealing, and thus most of the obvious candidates had already been picked off.

An additional bonus would be finding a club where the sellers are if not 'forced' then at least 'motivated' sellers, whilst the books should be as free as possible from any nasty surprises.

Regardless of the selling motivation of its owners at the time, it's not surprising that Charlton might fit the bill.

It has a modern stadium with a sufficient capacity for the foreseeable future, a terrific London location within sight of Canary Wharf and the booming O2 complex, a respected role in the local community, and a solid (albeit shrinking) fanbase.

Many of you might at this stage be saying, “I don’t disagree with any of this, but what’s the point?”.

Our point is a simple one. We believe strongly that it was Tony Jimenez who decided he’d like to own a football club and that it was Jimenez who developed and ‘sold’ the vision designed to ensure it worked. It is also likely that it was Jimenez that identified Charlton as an ideal club.

Unfortunately the Charlton ownership structure until recently was complicated, with a holding company/subsidiary structure, dual Boards and multiple directors who were holders of both debt and equity.

Although one can only speculate whether Richard Murray's original Baton Ltd deal (to wrest control of the club whilst restructuring the debt to directors), was done knowing that Slater/Jimenez were poised to buy the club, we're tempted to think the choice of the name 'Baton' implied a handing over of some sort.

Either way, once completed the club was now a far cleaner takeover proposition, a vital obstacle now removed.

However, there was an important problem with Jimenez’s desire to own a football club and with his vision for how to make it work.

There is little evidence to suggest that he is especially wealthy, and indeed even if he were, buying a League One club without any backing would be a surefire way to ensure he wouldn’t be wealthy for long.

After all, buying a football club is easy (many clubs are effectively available for free). It's the ongoing financing requirements that wipe you out.

Jimenez therefore needed someone to back him. He needed someone wealthy enough to give his plan a chance, to whom he could sell his vision and trust him. That person is our mystery person ie. the funder.

The funder may not even care much for football, though we don’t know either way. What we do know is that he/she has no desire to be publicly associated with the deal, at least for now.

Indeed, this need for secrecy is typical of him/her and seemingly extends almost to paranoia. It is possibly also reflected in the decision not to even own shares in the CAFCH BVI structure, even though it is specifically designed to enable anonymity.

We don’t know which key people at the club know for sure who this person really is (as opposed to who might merely speculate). When people say they don’t know, they may well be telling the truth.

The important thing is that the funder knows Jimenez well, and believes that he knows his stuff. Presumably he/she likes him and is thus willing to indulge him, so long as he's kept on a tight leash and that there’s a clear route to making some money.

And yes, we’re confident we are dealing with a motivated money-maker here, not someone willing to spend money on football as a luxury alternative (or complement) to a private jet or yacht.

This will no doubt be significant at some point. Michael Slater’s recent comment, “I would like to have at least one season as chairman of a Premier League club,” is interesting in this regard.

We assume that the funder’s expectation is that this investment will make money at some stage and that means in real hard cash, not merely on paper. We’ll return to this in a moment.

An interesting question, of course, is how does the ‘funding’ work? Unfortunately we are not privy to the arrangements here, although we note that it may be that they are directly between the funder and Jimenez/Slater, rather than CAFCH.

However, there is something we can say with a little more confidence - it is likely that Slater was instrumental in making the arrangements work and he was also probably the architect of the ownership structure, i.e. the structuring of the offshore CAFCH entity. He appears to have had prior experience in this area.

So how could Jimenez develop a plan to make money from Charlton which would entice the funder to get involved?

Clearly the ‘Newcastle-lite’ theory espoused above makes enormous sense in this context now, and especially so now that both Vetere and now Paul Hart are now onboard.

The signings agreed to date (eg. Hollands) and those rumoured to be agreed soon (eg. Hayes) do not seem to fit this model so far, but we believe this is because the ‘real plan’ will take time and these types of journeymen signings will at least keep the team reasonably competitive for now.

For now they can thus keep the club ticking over, whilst aiming to make some small money trading players and selling on youth prospects like Carl Jenkinson

As the plan is executed over time, surely promotion from League One must be a realistic goal within 3-4 seasons, if only they get just a few things right from here.

The correlation of on-pitch success and relative financial resources is too high to suggest otherwise.

This is not so far a route to great riches, but if done right it would show sufficient progress to the funder along promising lines.

Over time, if a place in the Championship can be consolidated then the carrot of eventual Premiership promotion remains in their sights by definition, especially so if they continue to execute on the plan.

If the ultimate promotion is achieved, then they can opt to 'twist or stick', or probably more likely ‘exit the game’ and sell the club on to a greater fool.

We're not going to join the debate about whether the new owners misled fans about likely meaningful short-term investment, but equally we don’t believe the self-serving spin that they saved the club from imminent administration (whose interests would that have served?).

Even if the funder was offering an open cheque book, we speculate that Jimenez wouldn’t mislead someone he respects, knowing full well just how dicey the football business can be.

Two big questions remain for us however to complete the picture. Firstly, why did they appoint Chris Powell? And secondly, what are their chances of making the above plan a success?

We think they decided immediately (if not before they even completed the acquisition) that Phil Parkinson was not part of their plans, whilst the type of young dynamic manager that would fit into the structure perfectly (eg. Eddie Howe) proved unexpectedly difficult to recruit.

If you are unkind, you might say they panicked and opted for Powell because he interviewed reasonably well, wouldn't upset the fans and might just with a bit of luck turn out ok.

If you are kind however, then you might conceivably view it as a very smart appointment.

After all, if you were planning a structural overhaul of a club which might take a couple of years to implement, who better to manage the team in the interim than someone totally inexperienced (yet importantly again loved by fans)?

In the event that results go poorly (as they have), he would have even less bargaining power than he had to begin with, as a plan is put in place around him. The last thing they needed was a Billy Davies-type character with attitude.

This is unfair on Powell perhaps, but he came into the job with his eyes wide open. To say that we wouldn't see him as a vital cog in the wheel would be a massive understatement; we doubt very much that he is in control of what is going on around him.

Clearly for the longer-term plan to work, it requires a manager who can mould what might conceivably be an exciting but rapidly changing combination of different talents, into a double promotion-winning team.

There is precious little evidence so far that Powell has this skill set, but the owners may be willing to be patient on the basis that smoothly implementing the plan supersedes any desire for immediate success (not that they wouldn't take it if it came along).

Moreover, if as we believe Slater and Jimenez are answering to another ‘stakeholder’ then merely saving face may be an important consideration for them too, especially if they were genuinely enamoured by Powell to begin with.

As it happens we believe we know which currently serving manager the new owners would like to take the club forward, but they will bide their time to ensure that individual gets to save face too.

In terms of the chance that this grand plan succeeds, the appointments of Vetere and Hart are highly promising, but throw Powell, Jimenez, Varney, and Slater into the mix, and you have a lot of egos rubbing up against each other.

After all we’ve been down this road before in a different form under Iain Dowie. How comfortable will Peter Varney be reporting to someone (Slater) considerably younger than him for example?

Conceptually the plan is highly appealing however. Anyone who has read 'Moneyball' by Michael Lewis (highly recommended if not) would be cognisant of the ability to have sporting success by 'thinking outside of the box'.

By viewing players merely as tradeable commodities who should be bought when undervalued and sold on when overvalued, there is certainly scope to gain an edge merely by being smarter than the rest of the market, much like the best financial investors are.

In the investment business, it would be described as a ‘value’ approach.

Clearly it requires patient fans that can see the bigger picture here too, never falling in love with individual players. You can imagine why it could never have worked at Newcastle.

However it’s always worth remembering that in professional sport, it's not as if the competition are just waiting to roll over in deference to our genius plan.

Highly talented managers are working miracles on tiny budgets all across League One, whilst the efficient operation of scouting networks and an Academy are hardly rocket science.

Clubs like Exeter, Rochdale and Bournemouth are successfully executing their own form of this same ‘value approach’, albeit on a smaller scale.

The key to success therefore will be whether Messrs. Powell, Jimenez, Vetere and Hart are genuinely superior talents, or instead what one might term mere ‘empty suits’.

There are mixed signals so far frankly, although we are willing to be optimistic on a medium to long-term view.

The decision to appoint Powell doesn’t really fit the intelligent value approach, but there may be a deeper agenda as discussed above.

Alternatively and very worryingly, perhaps his appointment signaled the new Board underestimate just how competitive League One is (presumably whilst overestimating their own talents), even despite Charlton being one of the richest clubs in it.

Finally and most importantly no-one (including Jimenez and Slater I suspect) really knows how long they have to get it right and have demonstrable success, before they too face their own searching questions from the funder.

At that point administration really might be a risk, and the fans will wonder why we ever thanked them for saving us from the same alleged fate.

This is one of the most informative and thoughtful posts I have ever seen on a Charlton blog. In terms of the analogy with value investing, I think there is a mixture of luck and skill there. J M Keynes knew how to play the markets but he took a haircut in the slump. My stockbrokers have give me some bad advice at times. The company I have had most success with I bought into when it was very small because I liked the management and now it is FT350 and I have a substantial stake. But even its shares have lost some 10% recently. Managements turn over much more slowly in business (generally) than in football. What about the general economic context with The Times naming Bexleyheath as the home of the squeezed middle?

Its a very interesting read However,where the theory falls down in my view is that if you view the funder's investment in CAFC as just another asset class , its never going to make the sort of returns that are available in all sorts of other areas. I'm sure that there is a 'funder' but I think they will duck out/get bored pretty quickly !!

Thank you for the time and diligent work you and your colleague have done on this matter. I now feel better about how things have turned out although like many still fear for the future. In closing I have enjoyed this article as well as all your postings keep up the good work.

Thanks for the comments. This piece has seen numerous drafts go back and forth between me and my fellow informed supporter.

Wyn, the key in my experience to value investing is patience and discipline. We'll see if they have either or both of these attributes. The fans in this context might be viewed as analogous to those who invested with investment managers who refused to buy internet stocks in 1999 - will they have a sufficiently long term view to ride through some difficult periods?

Anonymous at 10.45am, I agree that football is a lousy asset class although if my theory is correct they hope to reach the holy grail of the Premiership with very little net outlay. At that point I suspect they sell up if they can. The potential returns in this scenario are actually quite high, although the probability of achieving the return may be smaller than we hope. Then again I postulate that the funder is rich but somewhat bored, and might view his football 'investment' as providing at least some non-financial rewards too as he eagerly scours the newspaper for our result at Stevenage.

Finally, I chose not to publish a comment from an anonymous blogger who guessed the identity of the funder - I don't want to turn this blog into a speculation in this regard.

Great post, and first class analysis – even if it is not a desirable conclusion.

I have a few thoughts/comments:

I was not sure how there could be a backer that was going to make substantial investments into a business (and that is clearly what the club is) when that business is owned by someone else. Richard Murray did say (I’m sure it’s not a secret) that he was expected to match the investments made by the other shareholders at a rate of 10-1. This implies that the shareholding of those we know about (and those we don’t) will equate directly to their investment in the club.

With Slater and Jimenez owning 25.5% each of the company that owns 90% of the club that means that ‘the funder’ (assuming that it is one individual and his family/friends etc.) would only ‘own’ 44.1% of any investment he made. He would also only benefit from 44.1% of the proceeds of a sale in the event that we are sold – I’m assuming this would be in the Premier League. Thus, as you say, it is safe to assume that Slater and Jimenez are being backed by someone that they know and who trusts them. I think this, however, points to their being a lack of real wealth and inclination to invest it in a football club that they don’t support. I’m assuming that ‘the funder’ is not a massive Charlton fan.

Baton Ltd brought a wry smile to my face as I’ve heard Richard Murray refer to the club as a ‘baton’ that he wanted to pass on at the appropriate time. I think he was probably aware of the potential interest from Slater/Jimenez, but I suspect that name was less in lieu of that that it was his way of ‘describing’ his intentions irrespective of who the ultimate buyer would be. Clearly I don’t know for sure though.

Slater’s suggestion about wanting to be a Premier League Chairman for at least a season may well be what you have suggested, but I also think that ‘the funder’ is likely to want to step in at that point. Irrespective as to how much it costs to get there I would imagine that if you have a lot of money a few million to be entertained by the Directors of Liverpool, Man Utd et.al. would be seen as an affordable price, especially if you have many millions to start with.

My biggest fear from your piece, and the one that I have the most trouble agreeing with is that they would have budgeted for potentially another 4 seasons in this hell hole that is the 3rd division. Aside from the potential fall in attendances that you indicated the costs of bankrolling the club (especially with reducing gate receipts) could make the initial investment too high to ever hope to recover the capital investment. Assuming that the shortfall is £4m a season you would be £20m (including this season) behind when you get to the Championship, where we would probably only be able to break even) before you make an attempt for the Premier League......

If the ‘value’ approach is going to significantly reduce those annual deficits then things could change, but I can’t see it going far enough, and you are right to suggest that buying low and selling high is a great way to trade players, but like stocks and shares, that is basically what everyone else is trying to do. The only way you can realise a massive increase in value on a player is if he is good enough for one of the country’s elite. That is very difficult when they go out of their way to sign players at a younger and younger age. Carl Jenkinson may well be worth millions in the future, but if not Arsenal haven’t paid too much for him, and we haven’t realised an awful lot for him – particularly when you bear in mind that we will not unearth a player good enough for a Champions League team very often.

I see the ‘value’ approach as enabling a club in the division that it can ‘break even’ in making inroads to more success. An example of that is how we build the squad that went up in 1998 and then won the division two years later with relatively modest investment. I think a lot of this came from Curbishley’s eye for a player but also the patience that the fans gave him while we moved back to The Valley and developed it. I can’t see the fans buying into an approach that demands that we accept what we have seen for the last five seasons for another five.

I also have some very real concerns about what happens when ‘the funder’ and his ‘friends’ leave. Will they sell to a Gaydamak? If so will the club then be leveraged up to the point where a similar fall through the divisions becomes inevitable?

I have made no secret of my disappointment with the appointment of Chris Powell. He was a great players for us, and he is a very nice man (I have a friend that knows him), but he has managed to secure significantly fewer points that Phil Parkinson did with pretty much the same squad – arguably a better squad with BWP and the Premier League loan players. I really hope that he does succeed but I think he was appointed to keep the fans happy when Howe turned us down.

Sillav Nitram, I've no idea whether everything will turn out ok. As I wrote in my previous post, the range of possible outcomes has increased in both directions - I still hold that view.

KHA, Slater and Jimenez own 23% and 28% respectively, but that doesn't change the gist of your point. I agree it doesn't make sense that a 'funder' would only own 44.1% of the club in the event that the investment was successful, which is precisely what got me investigating and thinking about this further. The idea that Slater and Jimenez had 'saved' the club (with little evidence that they directly had the wealth to do so) always seemed fanciful to me, yet (along with Murray) they firmly own and control the club, no argument.

I'm not suggesting by the way that they want to spend 3-4 more years in League One, but that they might be willing to do so if it creates the foundation for longer-term success.

Nigel, I totally agree and have already started doing so. However back in SE7, I think there may be some exciting times ahead if the 'plan' as I see it plays out, but I don't think the club will provide us with the same warm fuzzy feeling as it did under Murray et al from the mid-1990s through today.

Well i'm prety much a layman in these matters but from what your saying it doesnt really seem like the funder is gonna make an uber amount of money out of this whole thing, even it the plan works flawlessly and we get promoted twice in the next 5 years.

If he's that rich anyway then im sure there are better and safer ways to make a quicker and larger return on his investment?

Sillav, i guess it depends how Powell was sold the role in the first place. If (as i suspect) it was made clear that his role would be limited to coaching and matchdays, then I don't think he's been treated shoddily at all. Infact he's lucky still to have a job given how rubbish we were ince Jan. However for now his job is probably safe for reasons alluded to above, and if he surprises us all to the upside then it will remain so.

Anonymous @10.15, i totally agree but that's why the friendship and trust with Jimenez is so vital. This is his dream and vision but he can't afford to screw it up hence the cautious but in my view, very sensible approach.

A very informative article and worthy of comment in that it makes good sense.The 'Funder' could then potentially be in breach of FA Regulations, given his involvement as a Director or more with another football club.

Very interesting post, and rightly or wrongly I have always believed that the funder was Kevin Cash. I also suspect your informed fan is Doug Chapman, and that there is also therefore an element of Rick Everitt in the mix as well :-)

Good stuff in this belated viewing. The Guardian commented at the time of the takeover that we were yet another club to be owned by a Caribbean box number. If even a Parliamentary debate can't reveal the true owners of Leeds, not much chance of public revelation in our case. When it comes down to the selfish matter of how well we might be doing, I don't give a toss; just hope "the funder" won't be tempted to cash in until the Duke of Westminster turns his interest to footie, or Lakshmi Mittal gets fed up with Rangers.